HIGHLIGHTS

Broad money in circulation moderated in February, as M3 posted a 6.1% YoY growth, compared to 6.7% seen in January. M2 also moderated, to 6.6% from 7.2% and M1 to 11.2% from 12.6%. On a monthly comparison, broad money supply fell by 0.3% MoM, M2 by 0.2% and M1 by 2.0%. For the first two months of the year though, overall money supply expanded by 7.5% compared to 1.9% seen in the same period a year ago.

The main reason behind the moderation in overall money supply was due to a smaller growth on claims to the private sector, which expanded by 10.5% YoY compared to 10.7% previously. This is synonymous with the winding down on spending after the festival season. On the other hand, there were higher net claims on government (+22.9% from 22.0%) and stronger growth of net foreign assets (+3.4% from 2.1%) despite the predominantly outward flow of financials.

Foreign trade receipts and FDIs are expected to square off or partially mitigate declines in net foreign assets due to the net effect of the QE tapering by the US Federal reserve. Currently, bond and asset purchases have been reduced to US$55b and is expected to maintain its pace of a reduction of US$10b each time. However, if the trend prevails, we may eventually be seeing more foreign capital flowing back into the country but we won’t bet our chips just yet on net foreign buyers. It may be a while yet, largely dependent on the state on the global and US economy and when credit from QE no longer plays a role. The US Fed is estimated to completely withdraw QE by 4Q14.

Though QE tapering is a sign of improving US economy, further backed by positive manufacturing statistics (its PMI sitting comfortable above the 50 point expansion level – last seen at 57.1) and improved spending (+0.3% in January from 0.2% previously) after a lull due to severe winters. However, there are still some very prevalent uncertainties in the jobs market, with labour participation rate remaining weak at 63%, a low last seen in the early1970s.

Meanwhile, loans growth in February expanded by 10.7% YoY, a slight moderation from 11.0% seen previously. On MoM-basis loans grew by just 0.2%, the slowest in 24 months, suggesting that the BNM’s macroprudential measures are beginning to work its way through to cool off credit growth for speculative purposes and deal with the high household debt.

In detail, there was a 22.7% increase of loans for the purchases of securities (January: 23.3%), and notably, a 559.3% surge in loans for purchase of consumer durables (January: 545.5%). Loans for the purpose of purchasing residential property ticked up slightly to 13.5% from 13.4% previously whilst loans to purchase passenger cars moderated further to 5.5% from 6.0%, on account of stricter requirements for auto loans, part and parcel of Bank Negara’s attempts to reign in household debt. On the business end, loans for the purpose of working capital moderated to 8.5% (January: 10.2%) but for use of construction increased by 12.0% from 11.7%.

On a sector basis, loans for financing, insurance and business services slowed to 13.7% after posting a 16.2% growth previously. The manufacturing sector saw a 1.8% growth, lower than 2.8% seen in the preceding month and loans towards wholesale, retail, restaurants and hotels saw a 5.9% growth, from 7.3% previously. Loans in the mining sector however, increased by 23.6% from 14.1% previously and for the transport, storage and communication sector, it increased by 4.6% from 3.5%. The loans towards electricity, gas and water supply remains unsurprisingly high, increasing by 45.0% (January: 40.3%) on account of an increased in the electricity tariff that came in to effect in January. Loans to the household sector moderated slightly to 11.8% from 11.9% previously.

Outlook

We reckon that spending, especially in the household and consumer sectors will be somewhat dulled for the 1H14 due to rising cost of living as a result of fiscal consolidation. It will be awhile before prices begin to normalize (we are looking at 6 to maybe 9 months). Whilst inflation remains cost-push and current rates still supportive of the economy as a whole, we do not think that BNM will change the OPR from its current level of 3.00% anytime soon. We feel that the OPR will remain at this level for sometime yet, so as to not hinder growth that’s being mitigated by fiscal consolidation (there’s every possibility of another round of subsidy rationalization later in the year) and following the proposed implementation of Goods and Services Tax starting April next year.

Source: Kenanga